Withdrawal of exemptions to pay local taxes: The TELCO cases

SC newsflash: SC Holds DIGITEL Accountable to Pangasinan for Local Taxes. The Supreme Court recently found Digital Telecommunications Philippines, Inc. (DIGITEL) liable to the Province of Pangasinan for the payment of provincial franchise and real property taxes. The SC affirmed the ruling of the lower court that the tax exemption in Republic Act (“R.A.”) No. 7925, the Public Telecommunications Policy Act of the Philippines, stating that any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted, shall be made part of previously enacted franchises and made automatically applicable to the grantees thereof, does not work to exempt DIGITEL from payment of provincial franchise and real property taxes.

Unfortunately, as of this writing, the decision in that case (GR No. 152534, Digital Telecommunications Philippines, Inc. v. Province of Pangasinan, 23 February 2007) is not yet posted at the SC website. So, let’s discuss the case cited in that DIGITEL decision – PLDT vs. City of Davao, et al.

PLDT vs. City of Davao, et al. (SC-G.R. No. 143867)

In its Decision dated 22 August 2001, as affirmed in its Resolution dated 25 March 2003, the SC ruled that PLDT’s exemption from the payment of local franchise tax was withdrawn by R.A. 7160, otherwise known as The Local Government Code of 1991 or LGC. No amendment to re-enact the previous tax exemption of PLDT was made by Congress.

Relevant facts

On 3 Aug. 1991, R.A. 7082 was approved, further amending the franchise of PLDT. Section 12 of said franchise provides that PLDT shall pay a franchise tax “in lieu of all taxes on this franchise or earnings thereof.” Section 12 reads:

The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate, buildings, and personal property, exclusive of this franchise, as other persons or corporations are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the telephone or other telecommunications businesses transacted under this franchise by the grantee, its successors or assigns, and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof . . .

On 1 Jan. 1992, the LGC took effect. Under this law, provinces and cities are authorized to impose tax on all business with a franchise and withdrew tax exemptions or incentives presently enjoyed by all persons. Section 193 reads:

Withdrawal of Tax Exemption Privileges. – Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or -controlled corporations, except local water districts, cooperatives duly registered under R.A. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code.

In 1992, Davao City passed Ordinance No. 159, imposing a tax on businesses enjoying a franchise, at the rate of seventy-five percent (75%) of one percent (1%).

On 1 March 1995, R.A. 7925 (Public Telecommunications Policy Act of the Philippines) was approved, providing for the equality of treatment in the telecommunications industry. The pertinent provision is Section 23, which reads:

Equality of Treatment in the Telecommunications Industry. – Any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted, shall ipso facto become part of previously granted telecommunications franchise and shall be accorded immediately and unconditionally to the grantees of such franchises: Provided, however, That the foregoing shall neither apply to nor affect provisions of telecommunications franchises concerning territory covered by the franchise, the life span of the franchise, or the type of service authorized by the franchise.

On 2 June 1998, the Bureau of Local Government Finance (BLGF) rendered an opinion to the effect that pursuant to R.A. 7925, PLDT is exempt from the payment of franchise and business taxes imposable under the LGC.

In January 1999, PLDT applied for a Mayor’s Permit to operate its Davao Metro Exchange. The City of Davao withheld action on the application pending payment by PLDT of the local franchise tax for the first to the fourth quarter of 1999. PLDT protested the assessment of the local franchise tax and requested a refund of the franchise tax paid by it for the year 1997 and the first to the third quarters of 1998.

PLDT’s argument and the Supreme Court’s ruling

1. PLDT argued that Smart and Globe are exempt from the franchise tax. Therefore, pursuant to the equality of treatment provision in Section 23 of R.A. 7925, it follows that PLDT must likewise be exempt from the tax being collected by the City of Davao. In other words, the grant of tax exemption to Smart and Globe ipso facto extends to PLDT.

To begin with, tax exemptions are highly disfavored. The rule is that tax exemptions should be granted only by clear and unequivocal provision of law expressed in a language too plain to be mistaken. Assuming that the word exemption in Section 23 refers to tax exemption and assuming further that Globe and Smart are exempt under their respective charters, then this runabout way of granting tax exemption to PLDT is not direct, clear and unequivocal way of communicating legislative intent.

The term “exemption” in §23 is too general. A cardinal rule in statutory construction is that legislative intent must be ascertained from a consideration of the statute as a whole and not merely of a particular provision. There is nothing in the language of §23 nor in the proceedings of both the House of Representatives and the Senate in enacting R.A. No. 7925 which shows that it contemplates the grant of tax exemptions to all telecommunications entities, including those whose exemptions had been withdrawn by the LGC.

Indeed, the word exemption in Section 23 does not mean tax exemption. In its original decision, the SC ruled that the word “exemption” in Section 23 of R.A. No. 7925 could contemplate exemption from certain regulatory or reporting requirements. In its Resolution on PLDT’s motion for reconsideration, the SC categorically stated that the term exemption refers to exemption from certain regulations and requirements imposed by the National Telecommunications Commission.

The best refutation of PLDT’s argument is the fact that after the enactment of R.A. 7925, Congress granted several franchises with the in lieu of all taxes provision. If the equality clause under Section 23 of R.A. 7925 automatically extends the in lieu of all taxes clause to subsequent franchises, there would have been no need to expressly include the clause in these franchises.

2. In its motion for reconsideration, PLDT argued that the legislative intent in R.A. 7925 is to promote the development of the telecommunications industry and that the way to achieve this purpose is to grant tax exemption or exclusion to franchises belonging to the industry. Moreover, by using the words advantage, favor, privilege, exemption, and immunity and the terms ipso facto, immediately and unconditionally, Congress intended to automatically extend whatever tax exemption or exclusion that was granted after the LGC, to a holder of franchise enacted prior thereto.

The SC ruled that the thrust of the law is to promote the gradual deregulation of entry, pricing and operations of all public telecommunication entities. An intent to grant tax exemption cannot even be discerned from the law. The records of Congress are bereft of any discussion on tax exemption. On the contrary, the sponsorship speech on the house bill which served as the basis of R.A. 7925 mentioned “equal access clauses” in interconnection agreements, not tax exemptions.

3. PLDT also argued that the policy behind R.A. 7925 is to promote healthy competition in the telecommunications industry. This law seeks to rectify the disparate situation wherein some holders of franchise are exempt from local taxes.

The SC ruled that one can speak of healthy competition only between equals. The in lieu of all taxes provisions in other franchises cannot be deemed applicable to PLDT, which had virtual monopoly in the telephone service in the country for a long time, without defeating the very policy of leveling the playing filed of which PLDT speaks.

4. The BLGF rendered an opinion that Section 23 of R.A. 7925 amended the franchise of PLDT and in effect restored its exemptions from local taxes. Courts should not set aside the BLGF’s contemporaneous construction because (a) its function is precisely the study of local tax problems and it has necessarily developed an expertise on the subject; and (b) it enjoys the presumption of regularity in the performance of its duty.

BLGF is not an administrative agency whose findings on questions of fact are given weight and deference in the courts. The authorities cited by petitioner pertain to the Court of Tax Appeals, a highly specialized court which performs judicial functions as it was created for the review of tax cases. In contrast, the BLGF was created merely to provide consultative services and technical assistance to local governments and the general public on local taxation, real property assessment, and other related matters, among others. The question raised by petitioner is a legal question, to wit, the interpretation of Section 23 of R.A. No. 7925. There is, therefore, no basis for claiming expertise for the BLGF that administrative agencies are said to possess in their respective fields.

It is true that the BLGF enjoys the presumption of regularity in the performance of its duty, but this has nothing to do with the question in this case. This case does not concern the regularity of performance of the BLGF in the exercise of its duties, but the correctness of its interpretation of a provision of law.

It is noteworthy that, in holding Smart and Globe exempt from local taxes, the BLGF did not base its opinion on Section 23 but on the fact that the franchises granted to them after the effectivity of the LGC exempted them from the payment of local franchise and business taxes.

5. PLDT also argued in its motion for reconsideration that the rule of strict construction of tax exemptions does not apply to this case because the in lieu of all taxes provision in its franchise is more of a tax exclusion.

Exemption is an immunity or privilege; it is freedom from a charge or burden to which others are subjected. Exclusion, on the other hand, is the removal of otherwise taxable items form the reach of taxation. The SC ruled that there is no difference between tax exemption and tax exclusion, both in their nature and their effect. Besides, the uniform ruling of the SC is that the phrase in lieu of all taxes refers to tax exemptions.

6. In its motion for reconsideration, PLDT argued that its franchise is a specific law, and that the LGC is a general law. Accordingly, the specific law should prevail. Moreover, since the LGC and R.A. 7925 are inconsistent, R.A. 7925 should prevail considering that it is the subsequent enactment.

The SC already ruled in the case of City Government of San Pablo, Laguna vs. Reyes, that the phrase in lieu of all taxes found in special franchises should give way to Section 193 of the LGC. As to the alleged conflict between the LGC and R.A. 7925, the SC held that such conflict does not exist, as discussed above.

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